Looking For A Good Squeeze (UOBKH)

Strategy – Malaysia : Looking For A Good Squeeze 
Current FBMKLCI: 1,626.38
End-12 FBMKLCI Target: 1,560

• Extended low interest rate environment squeezing up high yield plays. The yield compression investment theme will continue to squeeze out good investment returns, amid an extended period of global economic softness and low interest rate environment. With most major central banks lowering their benchmark interest rates this year, there is a likelihood of Bank Negara jumping on this bandwagon under our view of persistent global economic malaise, which suggests continuing investment preference for the defensive capital management and high dividend yield plays. 

• Strong ytd share price performance by high yield favourites, continuing their impressive run since 2011. These include most telecommunication stocks 
1) (eg Maxis has risen 24.2% ytd), 
2) favourite REITs (Pavillion REIT +14.1% ytd), and 
3) FMCGs (British American Tobacco +16.8% ytd). 

Consequently, most of these stocks’ net dividend yields have now fallen to 5.0-5.5% or below (see RHS table and charts overleaf). 

• With a lower threshold dividend yield of 5.0-5.5%, sizeable companies offering around 6% net yield or higher should appeal. Under our coverage, companies that can sustain or capital manage to raise their net dividend yields to around 6% or higher include 
1) Berjaya Sports Toto (BToto), 2) DiGi, 3) Maxis, 4) Guinness Anchor. 

BToto stands out as the only yield play that has not appreciated at all this year. 


• Go with the defensive and dependables. We expect defensive sectors to modestly outperform the market as they did in 1H12, amid a low interest rate environment and the global economic slowdown, which suggests that investors would still pay premiums for defensive and high dividend yielding stocks. We advocate a highly defensive strategy and OVERWEIGHT defensive sectors like gaming (specifically number forecasting operators (NFO)), telecommunications, plantation and consumer (tactical). Among these, gaming is the most attractive, trading in line with their historical mean PE multiples, whereas capital gains upside for the consumer and telecommunications sectors are limited by their above-historical mean PE multiples. 

• Our favourite yield plays that are expected to sustain dividend yields of around 6% or higher in 2013 are BUY-rated Maxis, Berjaya Sports Toto, DiGi.Com (DiGi) and Multi-Purpose Holdings (MPHB), as well HOLD-rated Guinness Anchor. 

• However, there can be potential profit taking on historical yield plays with exceptionally low yields. We do not think that yield plays can sustain net yields of below 5%, unless they offer strong earnings growth prospects post-2013. These include KLCC Properties (HOLD), whose net yield is expected to be around just 4.5-4.8% even after it REITs its property assets. This is unattractive vs 10-year government bonds yields of around 3.5%. Likewise, UMW Holdings (HOLD) could be vulnerable to profit taking as it provides a 2013 net yield of only 4.1% (4.9% even under an optimistic scenario), vs its historically net yield range of 3.7-6.6%. 

Source: UOB Kay Hian research
Publish date: 16/07/12